CPT - NYSE

Good morning, and welcome to Camden Property Trust's First Quarter 2023 Earnings Conference Call. I'm Kim Callahan, Senior Vice President of Investor Relations. Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman and President; and Alex Jessett, Chief Financial Officer. Today's event is being webcast through the Investors section of our website at camdenliving.com, and a replay will be available this afternoon. We will have a slide presentation in conjunction with our prepared remarks, and those slides will also be available on our website later today or by e-mail upon request. [Operator Instructions] And please note, this event is being recorded. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC, and we encourage you to review them. Any forward-looking statements made on today's call represent management's current opinions, and the company assumes no obligation to update or supplement these statements because of subsequent events. As a reminder, Camden's complete first quarter 2023 earnings release is available in the Investors section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures, which will be discussed on this call. We would like to respect everyone’s time and complete our call within one hour. So please limit your initial question to one, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we would be happy to respond to additional questions by phone or e-mail after the call concludes. At this time, I'll turn the call over to Ric Campo.

Good morning. Culture matters. This year, we are celebrating Camden's 30th anniversary as a public company. And last week, we wrapped up a 12-city celebration tour that included all 1,600 Camden team members. The tour is an annual Camden event, but we usually split up our executive team to cover the events. This year, Alex and Laurie Baker joined Keith and me at all 12 stops to celebrate our team's 2022 accomplishments and Camden's 30th birthday. Each celebration featured our teams in vintage 1990s attire and demonstrating one of Camden's nine core values: to have fun. I'm going to share an inside baseball look at Camden's unique culture set to a 1990s classic, All Star. [Audio/Video Presentation] While we are on tour, we got word that for the 16th straight year, Camden was included on Fortune's list of the 100 Best Companies to Work For. We claim this honor on behalf of our Camden team and the entire REIT world. It is a testament to just how much progress we have made over the last three decades, and that culture really does matter. Operating fundamentals continue to be good. We are on track to meet or exceed our 2023 plan. Multifamily transactions have slowed dramatically. Activity for the first quarter was down 74% from last year as buyers and sellers try to recalibrate the increase in their cost of capital and what the future market dynamics may look like. New starts continue to be elevated with only legacy projects with committed capital starting. We expect the lag in Federal Reserve policy will start to have its desired effect with a significant reduction in new starts beginning in the second quarter and throughout the next year or two. I'm betting the over, on a 60% reduction in starts once monetary policy and the banking crisis make their way through the system. I want to thank and congratulate Team Camden for their hard work and staying true to our commitment to improving the lives of our team members, our customers and our stakeholders, one experience at a time. Next up is Keith Oden.

Thanks, Ric. Now some details on our first quarter 2023 operating results and April trends. Same-property revenue growth for the quarter was ahead of our expectations at 8%, and we've raised the midpoint of our 2023 revenue guidance as a result. Once again, we saw the highest growth rates in our three Florida markets: Tampa, Orlando and Southeast Florida, with Nashville also posting strong results. First quarter signed leases grew by a blended rate of 4% with new leases up 1.8% and renewals up 6.7%. Our preliminary April results are trending at a similar level for blended rate growth with slightly higher new lease rate growth and moderating renewal rate growth. Renewal offers from May and June were sent out in the mid-6% range. While these growth rates were down from the record levels seen in the first four months of 2022, our 2023 year-to-date performance is actually stronger than what we would historically expect to achieve during the first four months of the year. Occupancy averaged 95.3% during the first quarter of 2023 and is trending slightly better to date in April. Net turnover for the first quarter of 2023 was 36%, in line with the first quarter of 2022. And move-outs to purchase homes dropped to 10.1% for the first quarter, one of the lowest levels on record in our 30-year history. I'll now turn the call over to Alex Jessett, Camden's Chief Financial Officer.

Thanks, Keith. Our new development lease-ups remain stronger than usual as we average approximately 45 leases per month at Camden Atlantic, a 269-unit, $101 million community in Plantation, Florida, which stabilized during the quarter; approximately 40 leases per month at Camden NoDa, a 387-unit, $108 million community in Charlotte, which began leasing during the quarter and is now over 35% leased; and approximately 30 units per month at Camden Tempe II, a 397-unit, $115 million community in Phoenix, which continued leasing during the quarter and is now over 70% leased. Turning to our financial results. Over the years, Camden has fully supported the NAREIT definition for funds from operations or FFO, and we will continue to report that metric going forward. However, in an effort to improve comparability and alignment with the current reporting practices of our peers in the multifamily REIT sector, we will now also report core FFO to adjust for items not considered to be part of our core business operations. We presented both metrics in our earnings release last night for our actual performance during the first quarter and have included both metrics in our guidance for the second quarter 2023 and full year 2023. Any property level adjustments we make to drive core FFO, which primarily are unusual or large casualty events, severance charges in 2022 related to changes to our on-site staffing model and the amortization, if any, of below or above market leases associated with acquisitions will also be adjusted from our same-store results. These property level adjustments will be located in the other section of our components of NOI in our supplement. For the first quarter, we reported both NAREIT FFO and core FFO of $1.66 per share, $0.01 ahead of the midpoint of our prior quarterly guidance, resulting primarily from better results from our same-store communities. These results represent a 12% per share core increase from the first quarter of 2022. Our first quarter outperformance was primarily driven by $0.02 per share and lower-than-anticipated levels of bad debt as we experienced a higher-than-anticipated level of move-outs by non-paying residents during the quarter. All the municipalities in which we operate have now lifted their restrictions and our ability to enforce rental contracts. And the resulting move-outs of non-paying residents happen earlier than we anticipated with twice the amount of move-outs in the first quarter of this year as compared to the first quarter of last year. Although these early move-outs of delinquent residents do put some pressure on physical occupancy, we reserve for effectively 100% of delinquent balances. And therefore, there is no net negative impact when non-paying residents leave. Rather, we receive the benefit of having our real estate back, the opportunity to commence a lease with a resident who abides by their rental contract and lower bad debt from having a new resident who actually pays. Our outperformance was also driven by $0.005 in slightly higher-than-anticipated net market rents and $0.01 in higher other property income primarily driven by elevated levels of utility rebilling, which was entirely offset by higher utility expenses. Our $0.035 per share of positive same-store revenue results was partially offset by $0.025 of higher same-store property expenses primarily driven by much higher-than-anticipated levels of property insurance claims resulting from an unusual spike in smaller claims, generally under $25,000 per occurrence, which did not count towards our aggregate $3 million exposure. To illustrate the spike, in the first quarter of this year, we experienced the same number of claims that we experienced cumulatively in the first quarter of the prior three years. At this time, we believe the volume of claims is an anomaly, but we have made a resulting partial increase to our insurance forecast for the rest of the year, which I'll discuss later. Our original 2023 same-store guidance called for revenue growth of 5.1%, expense growth of 5.5% and NOI growth of 5%. Included within our 2022 results which drove this original guidance was approximately $900,000 of first quarter 2022 revenue associated with the amortization of below-market leases from previously acquired communities and approximately $900,000 of first quarter 2022 severance costs associated with changes to our on-site staffing model. These offsetting amounts are now considered noncore and have been removed from our 2022 same-store for 2023 comparison purposes. Additionally, our full year 2022 results included a net $1 million of noncore casualty losses primarily in the back half of 2022, which will also be removed from our 2022 same-store results for 2023 comparison purposes. The effect solely from these adjustments would be to increase our original 2023 same-store revenue guidance from 5.1% to 5.2% and increase our original same-store expense guidance from 5.5% to 5.9%. Last night, we further increased the midpoint of our full year revenue growth to 5.65%. This additional increase is based upon our first quarter revenue outperformance, which primarily resulted from the previously mentioned acceleration in move-outs of non-paying residents and our slightly higher net market rents and other property income. Additionally, we further increased the midpoint of our same-store expense growth to 6.85%, almost entirely driven by actual and anticipated higher insurance costs. Insurance represents approximately 6% of our total operating expenses. And after taking into account the previously mentioned adjustments for 2022 noncore casualty events, was originally anticipated to increase by 18% in 2023. After taking into consideration the higher first quarter claims, we have increased our anticipated monthly losses in our forecast. We have also updated our May 1 anticipated premium increase from 15% to 20% as insurance providers continue to face large global losses. We now anticipate our total insurance expense will increase by approximately 35% in 2023. These insurance increases for the remainder of the year are partially offset by anticipated slightly lower salaries and property taxes. After taking into effect the increases in both revenue and expenses and the adjustments for noncore property level events in 2022, the midpoint of our 2023 same-store NOI guidance is 5%, and the midpoint of our full year 2023 core FFO is $6.86. At the midpoint of our guidance range, we are still assuming $250 million of acquisitions, offset by $250 million of dispositions with no net accretion or dilution and $250 million to $600 million of development starts spread throughout the year with approximately $290 million of annual development spend. We also provided earnings guidance for the second quarter of 2023. We expect core FFO per share for the second quarter to be within the range of $1.66 to $1.70, representing a $0.02 per share sequential increase at the midpoint primarily resulting from an approximate $0.03 sequential increase in same-store NOI resulting from higher expected revenues during our peak leasing periods, partially offset by the seasonality of certain repair and maintenance expenses and the timing of our annual merit increases and a $0.005 sequential increase related to additional NOI from our development and non-same-store communities. This $0.035 cumulative increase in core FFO is partially offset by a $0.005 decrease from higher second quarter G&A resulting from the timing of various public company fees and a $0.01 decrease from higher floating rate interest expense. Our balance sheet remains strong with net debt to EBITDA for the first quarter at 4.3x. And at quarter end, we had $268 million left to spend over the next three years under our existing development pipeline. At this time, we will open the call up to questions.

[Operator Instructions] And our first question will come from Jamie Feldman of Wells Fargo.

Great. I guess I was hoping to focus on rent growth in April versus the first quarter. It looks like it moderated down to 3.9% from 4.5% on a blended basis. Can you just talk about if that seems to be a trend heading into spring leasing, if there's anything else to read into there? And then maybe across the different markets, what drove the decline?

Yes. So we did see a slight decrease. But overall, we think this is -- April, the March to April transition to us looks a lot like previous years to COVID. They're just -- we do expect to see and have seasonality back in our leasing activity. It's certainly a different than what we had in the last two years of transition into the spring leasing season. So I don't see that -- I think we'll have a normal seasonality. I think that we're on track to beat our original plan. I think at the end of the first quarter in every single market with the exception of one of the 15, we're actually ahead on budgeted revenues. So from our perspective, it looks like: A, more normal; and B, on track and slightly better than what we originally anticipated going into the second quarter.

And Jamie, I think I'd focus more on the signed leases rather than the effective because the signed is more an indication of the direction we're going. And signed leases went from 4% in the first quarter to 4.2% in April. So it actually increased.

The next question comes from Josh Dennerlein of Bank of America.

Maybe just one follow-up on your comment there. You said one market is underperforming your budget. What market is that and on the flipside, what markets are performing the best?

Yes. So Atlanta was actually below on revenues but below our original budget in the first quarter, and that is primarily due to skips and evictions are pretty elevated. We also had some challenges with an elevated level of fraud, which pops up from time to time in several of our markets. And it was just sort of Atlanta's turn for that to happen, and we did see a fair amount of that in the quarter. Across the board, other than Atlanta, everyone, every single market outperformed our original plan. We had continued strength in the Tampa, Orlando, South Florida markets. Nashville had a great quarter relative to plan. So I think overall, at the footprint, it really looks like it performed very well in the first quarter, and I think we're off to a really good start of the second quarter as well.

The next question comes from Derek Johnston of Deutsche Bank.

You mentioned in your opening remarks a possible 60% drop in new development given the macro. But I'd ask, what are you seeing in input cost for development? And given it takes a couple of years to complete, does second half '23 become interesting to Camden given the balance sheet from a starts perspective and the land banks so that you really have new product as deliveries decline exiting the downturn?

Absolutely. When you think about what's going on, the only deals that are getting done, are our legacy deals that either -- that have debt and equity already sort of committed to. Any new development or sort of second- and third-tier developers are not getting their deals done. And so there will be a significant decline in, we believe, in starts beginning in the second quarter and probably all the way through into the first part, maybe second half of 2024, which definitely sets up a pretty interesting environment in '25 and '26 because obviously, as you point out, that development takes a long time to bring to the market. So given our strength in our balance sheet and our pipeline, we definitely -- definitely we'll look at delivering -- starting new projects when other people can't and delivering into what could be a really good market in 2025, 2026. I think the input costs, the good news is, is that they are flat. We haven't started to see major decreases in cost. Lumber is at a very low level today. And that's good news. So rather than in our pro formas, we would usually put a 1% per month inflation, let's say, if we were doing it last year at this time, and now we're at least flat. And potentially, once the, I think, the subcontractors start working through the inventory they have today and they start looking out on the horizon, they're going to have to squeeze their margins to be able to get new business because there's going to be more competition, I think, for less projects getting built. Therefore, more competitive set with the subcontractors and which should constrain their margins and perhaps have costs down more from here. The big input that hasn't gone down yet are salaries. And at the end of the day, you just haven't had a lot of pressure on construction workers or folks that are in that side of the business. But that could happen depending upon -- we know starts are going to come down. The question is how fast will the merchants compress for the subcontractors, and that's where the largest part of the input cost on construction is.

The next question comes from Alexander Goldfarb of Piper Sandler.

So Ric and Keith, I have to ask you, you guys have been a standout in NAREIT discipline on FFO and pretty upfront in taking all of your lumps positive or negative over the years. Sort of curious why you guys chose to move when core FFO is not an official metric, there's no standardized definition. So everyone sort of dines a la carte. And I mean, we just did a study of it. And most of the items that people back out are actually recurring business: legal expense, storms, debt prepay. I mean, all these are normal parts of the business. So I'm just sort of curious why you guys chose to go down this route.

Yes. We chose this because our competitors are doing it. And the challenge we have, we've been sort of coached by other investors and shareholders that they were getting confused about numbers. And I will give you exact example of that. When we produced our initial guidance for 2023, probably half or 2/3 of analysts missed the mark-to-market on rents from our acquisition of the Texas Teachers portfolio. And so we just wanted to codify it in a way where people could actually see it in specific financials and not have to look at -- look through footnotes and try to figure out, okay, yes, they have this item and that item. And so we're trying to just make it more simple for people to understand what's going on in those numbers. And I think having to have people scour through the financial statements and try to understand where the variations are is complicated, and we're trying to make it more simple for people. We still have NAREIT FFO definition obviously, and then we just give folks more information about adjustments to NAREIT so they don't -- it makes it easier for people, I think, to model future earnings.

Yes. But I mean for 30 years, it worked. And it's our job as analysts to go through the financial statements, right? So I mean, that's -- it doesn't create comparability only because you guys may have certain items. You -- other companies have others. So it arguably makes it more confusing, not easier, but appreciate the feedback.

Based on the conversations that we have with people after they missed this really big item in 2022 relative to 2023, now all you have to do is go in and look at the reconciliation between NAREIT and core. And you can see all the items there, and you don't have to go dig in through financial statements. And unfortunately, I know you guys are pretty -- analysts are pretty overworked, if you want to call it that, in terms of being able to find stuff. And it may be the job of a lot of folks, but we just want to make it easier for those who don't have the time to go through and read every footnote.

And the good news, Alex, is that for the -- for people who want to use the original NAREIT definition, it's there for anybody to use. So it just -- I think more information is generally better. So thanks.

The next question comes from Haendel St. Juste of Mizuho.

I wanted to go back to the commentary on getting some of the long-term delinquents of the portfolio. I think we assume you're primarily referring to SoCal. I guess can you remind us what's in the full year '23 same-store revenue guide from a net bad debt impact perspective? And what's your updated expectation?

Yes, absolutely. So originally, we anticipated about 140 basis points for the full year. And today, we've got about 120 basis points.

So let me just give you a little color too on skips and evictions. So skips and evictions are basically double in the first quarter what they normally are. And 80% of those skips and evictions were people that owed us significant amounts of money. So the good news is, while our occupancy is not as high as it was and our skips and evictions have doubled, we're getting people out that aren't paying rent. So from an economic occupancy perspective, it's a really good thing to have that happen. And we're hoping that it accelerates in markets like Southern California. As soon as we can get our real estate back to -- with paying customers, the better for us.

And just to put a -- just as a data point reminder, for 27-plus years, our bad debt ran roughly 50 basis points. And then in COVID, we went up to about 150 basis points. And it's -- clearly, it's -- we've peaked, and we're coming back down that curve. And whether -- is it a new world order where we don't ever get back to 50? I hope not, but I certainly don't have any reason to sit here and believe that we don't get back to 50 basis points of that debt once all of the bad actors that have been cycled through. And certainly, it's our hope and expectation that we will get a lot closer to 50 basis points of bad debt expense from where we are today at 120.

No, that's helpful. Question -- follow up if I could. I guess the plan to go after the 80% who skipped, what's your expectation or plan there? And then with the turnover picking up from these getting people, I'm assuming CapEx turnover, some of the OpEx costs are going up. Just curious if that's already embedded in your expectation as well.

So the offset on the turnover is that we've had very low move-outs to purchase homes. So that's been the benefit on that side. So we're not really seeing a significant uptick on CapEx or repair and maintenance costs associated with turns. And then the folks who move out with balances, obviously, we're going to do what we can legally to try and make them pay what they owe us.

The next question comes from Eric Wolfe of Citi.

It sounds like a piece of the same-store revenue increase was due to higher rate growth in 1Q than expected. Could you just talk about sort of how much higher it came in than what you were thinking, which markets drove the improvement and whether you still expect overall market rent growth to be 3% this year?

Yes. So we think overall market rent is going to be just a hair north of 3%. That's what we've got baked into our numbers. What I will tell you is that we did see slightly higher market rent really across the board in every one of our markets. So that's a good trend. And obviously, 1 quarter is -- makes us a little optimistic, but we'll see how it continues as we go through our peak leasing periods.

The next question comes from Ami Probandt of UBS.

I was just hoping to touch on Houston. It's been a bit of an underperforming market. I was wondering if you thought that, that was more due to a muted level of demand? Or if you're seeing good demand but supply is just making the conditions challenging? And what are your expectations for Houston going forward?

Houston is going to be, I think, a really good long-term market. It definitely has supply challenges. And what's interesting is that you compare Houston to, say, Dallas or Austin, Houston was slower to add back jobs primarily because of energy. And the energy companies have not added back all the jobs that were cut during COVID. They've figured out how to be much more efficient. But when you start looking at other metrics like for example, the current census data that came out just recently for 2021 versus 2022 ending June 30, 2022, Houston had -- Houston was the fifth or the second largest growth in population of roughly 125,000 people moved to Houston during that one-year period. The only other city that was higher than that was Dallas at 170,000 units. And to give you kind of a sense of the -- this migration issue helps Houston, helps Dallas. But because of the oil energy or the energy jobs that weren't replaced and also supply, we haven't been able -- we haven't seen the same kind of top like we did in Dallas or Austin. So it's more of a steadiness in Houston than a big increase like we saw in a lot of other markets versus Houston. I think Houston continues to be steady growth. And with the supply side getting ready to shut down pretty dramatically over the next year or two, it should be positioned really well to grow. When you think about the population growth, the top 20 cities in America, 10 of which were in Camden's market. And our markets gained roughly 780 -- or 580,000 job or 80,000 people net, while if you look at the three other major markets that lost were New York, L.A. and San Francisco lost 300,000 in population at the same time that we gained in our markets almost 600,000 job -- population base. So while it's not white hot here, obviously, like it is in Tampa, Orlando, South Florida, it's still pretty respectable.

Okay. So would you say that then it's more of a supply impact?

I would say that, yes, I think it's more of a supply impact than it is -- yes. I mean, because if you don't have the -- we didn't have the white hot job growth like Dallas and Austin did because of energy. And so it's been more of a goal line, get along. So it's a little less jobs and a little -- and supply combining that to take the sort of the sizzle out of the market, if you want to call it that.

So just to put some numbers around -- just to kind of put some context around that in Houston in the first quarter, our actual -- the average monthly rental rate grew by 6.4%. So if our -- the overall portfolio, of course, grew at much higher than that. But if this were -- if you were comparing trends today in Houston versus looking backwards over the last 30 years, you'd say, oh my gosh, that was a really good quarter for run rate growth. And we had a little slip in occupancy that we think corrects itself in the second quarter. It's related again to some kind of one-off challenges around skips and evictions and a few cases of fraud that we have to -- it seemed to be more prevalent in today's world than they were at pre-COVID days, but we're working through that. So overall, I think Houston is going to be fine and is well ahead of plan from what we thought it would be at this time of the year. So I think we're going to be fine.

The next question comes from John Kim of BMO Capital Markets.

Robin Haneland here filling in for John. One of your peers acquired a lease-up in Atlanta, a 6.6% cap rate, 5.7 tax adjusted. Do you think you'll see more deals in lease transact at these levels?

I do. I think that as the market can use to evolve, cap rates have obviously moved up given the very low volume and acquisitions. I think there's just going to -- there will be a point in time merchant builders need to sell to be able to pay their debts off. And I think that there's going to be a fair amount of that going on. If we continue to keep rates, especially short rates as high as they are now, which I don't see any light at the end of that tunnel anytime soon given the Fed's position, then it's putting pressure on those merchant builders. And I think there's going to be likely more transactions once they get to the point where they -- where hope is maybe dashed a bit more for them. And then they'll -- pricing will come more towards buyer's pricing rather than seller's pricing, and there should be some opportunities there.

Got it. How opportunistic would you like to be there?

Well, we're positioned really well with a strong balance sheet. And I guess the real question will be, when do we get to that sort of tipping point where cap rates really look attractive? And when you can buy a property for lower than replacement cost today at a cash-on-cash return in the mid-5s to 6, that's a pretty attractive opportunity depending on the market. I think you are going to have some softness going forward in certain markets, given the supply side of the equation. And that should position buyers, including Camden, to take advantage of that.

The next question comes from Chandni Luthra of Goldman Sachs.

Could you talk about how concessions are tracking across your market and perhaps where are the markets where the use of concessions has inched up a bit since fourth quarter?

We don't use concessions. The only except in the case of where we're doing a new lease-up because it's always just sort of been the consumer's expectations. So where we have lease-ups going on, fortunately, the lease-up rates have been pretty phenomenal on our new lease-ups. So we're actually using much less concessions than we normally would. We are having at our Atlantic product in South Florida averaged almost 45 leases per month through the entire lease-up, which is kind of insane. And so we're -- and again, we're having great success at our other lease-ups as well. And our broad portfolio, our stabilized assets, we just -- we -- with revenue management, we use a net pricing model, and we don't really -- make it easier for the consumers so they don't have to do the math. And we don't really use concessions although I would tell you that in certain submarkets, our competitors, you see that it comes and goes. Primarily, they tend to be very reactionary. They see some softness, and then they offer concessions. And if it continues soft, then they double the concession. But we just -- that's just not part of our pricing discipline.

Great. And in the past, you've talked about new supply in some markets being more pronounced than others. Perhaps you could just give us a refresher there. What are the markets where you're seeing more supply pressure, and what are you seeing on the ground from that standpoint?

Sure. Without running through all 15 markets, I mean, just kind of give you some macro look, and we can go into the details after the call if you like market by market. But -- so if you go up to Camden's markets combined, the completions that we had across Camden's platform in 2022 were about 127,000 apartments. We expect that to -- and these are Ron Witten's numbers. We do expect that to jump this year to about 188,000, so about a 50% increase in completions across Camden’s markets in 2023. And again, based on Ron's Witten's numbers, that number jumps to about 228,000 in 2024, and that would be the peak at least using his numbers for this cycle. So we're going to have -- we are going to continue to have supply pressure at our portfolio over the next two years, for sure. But when you -- completions and new supply is very location-dependent. So just because you have X number of -- X thousand apartments being delivered in Houston or in Austin or city, there are large metropolitan areas. And you have to really drill down and say, okay, what of this supply that's being built and delivered is going to actually be competitive where Camden's portfolio is located. And if you go through that, across our portfolio, all 15 markets of the total supply that's coming in 2023 and 2024, there's only about 40% of that product that is locationally competitive with Camden's existing portfolio. And if you go one step further and say on a price point basis, if our assets in those submarkets are average 15 years old, and you're delivering new construction, there's just a different price point that's -- that makes some of this non-competitive as well. And if you screen it for both location and price point, there's only about 20% of the new assets that are being delivered across Camden's portfolio that we are probably going to experience direct competition with. And when you look at it in that regard, it becomes much less dawning. I would say that based on our first quarter results and kind of what we're looking at for the next -- for the balance of this year, even in light of the increased completions that we know are coming across our platform, if we were going to see a lot of impact, if a lot of the stuff was truly competitive with Camden's products, we'd be seeing it right now. But the reality is only about 20% of it turns out to be truly competitive. I think we're in pretty good shape at a macro level for Camden's markets.

The next question comes from Robyn Luu of Green Street.

Can you provide more color on the lower property tax expectations? Is this a result of more successful appeals? And how many more appeals do you expect to finalize in the coming quarters?

Yes, absolutely. So originally, we thought we were going to be up 6.5%. Now we think we're going to be up 6.2%. The primary driver of that is that we've gotten some preliminary valuations that came in a little bit lower than we expected. Keep in mind that we can test basically everything. And so we anticipate that we will contest almost all of these valuations. We'll work through that as we go through the rest of the year. A lot of the values that we're going to test this year, we actually won't get the benefit of until 2024, but that certainly is our process. If you think about what we're anticipating in terms of refunds, we're actually anticipating a pretty significant amount of refunds in 2023. Most of those, once again, are driven by 2022 sort of actions. So that's where we are. Tax refunds in '23 are estimated to be $4.8 million. That's up $600,000 on a year-over-year basis. So really, the main ticket that's out there that we have to wait for is rates, and we'll get most of our rates in really starting in August of this year and running through October.

The next question comes from Austin Wurschmidt of KeyBanc Capital Markets.

Just curious, turnover had increased in the first quarter, but you've talked about how move-outs to purchase a home are down pretty significantly, which makes some sense given -- I'm just curious kind of where you think residents are going? Do you think people are trading down in price due to several years of outsized rent increases? Is it in the single-family rentals or people potentially bundling up? Just kind of curious what your take is on the move-out piece.

So I'll address the first item, which is exactly right, is move-outs to purchase homes have come down pretty significantly, but we have doubled our early move-outs that are related with non-paying residents. So that's sort of the trade-off on that side. And then when we look at where -- or the reasons for move-out, we really haven't seen -- other than those two, we haven't seen any changes. The #1 reason why people typically move out is a relocation, and it's usually associated with where they're finding jobs. So it's moving within the market and moving outside of the market.

Yes. It's skips and evictions. I mean, that's the bottom line is that we had almost double skips and evictions in the first quarter this year than we had in the last couple of years in the first quarter. So that -- the 10% is -- that's a -- we've got to get -- we're near an all-time low for move-outs to purchase homes in our portfolio. My guess is, is that probably trends back up in the second quarter. There's a little bit of seasonality to that number. But yes, the fact that we're flat year-over-year on turnover is almost exclusively increasing skips and evictions.

Got it. And then just a clarification. You mentioned you're sending on renewals for May and June in the mid-6% range. And the renewals you signed in April were closer to that high 5% range. So just curious if that's the difference between the take rate versus asking or did something give you the confidence to kind of bump up renewals again a little bit higher as you get into the peak leasing season?

No, you're correct. That's the difference between the take rate and the asking. And we're always -- there's always some flexibility around the renewal process. And if a community is off their target, then the way that we can make sure that we're maintaining our occupancy target is to make sure that we don't -- we keep the back door closed. So that's the difference.

The next question is a follow-up from Alexander Goldfarb of Piper Sandler.

Just circling back on the insurance, a two-parter. Alex, you mentioned 20% increase in your expectation for premiums, but you also mentioned 35% overall. So I'm guessing the latter includes your claims in addition to the premiums. The second part is, Ric and Keith, do you anticipate that potentially competitors like in a Florida or Texas would be unable to get insurance, and therefore, those properties would sort of have to close, and that would put more demand on your properties? I'm just sort of curious what happens with properties that can't fill their insurance book this year just given everything that's going on in Florida and Texas.

Yes. So Alex, you're right on the first part. So that's exactly what it is. So we've got -- our premium is higher than we anticipated, and we're actually going to bind that on Monday. But the offset to that is just -- or excuse me, the addition to that is just a much higher amount of claims.

Yes. And to the second question on people shutting down their properties because they can't get insurance, I don't think that's going to happen. I think what happens is, is it creates an opportunity for folks like us who broadly insure a very large portfolio. Our insurance cost is going to be lower than a standalone insurance policy that somebody can get in Florida. So I don't think it's -- I don't think you're going to see properties close down, but what I do think you're going to see is that we'll put more pressure on people to sell, and the pricing will be reflective of what the cost is from an insurance perspective.

Yes. And we are hearing of further new developments in Florida that are not able to start in part because of very large insurance increases. So obviously, that's a net positive for us.

The next question is a follow-up from Eric Wolfe of Citi.

Just wanted to follow up on your comment around expecting a 60% reduction in starts. Obviously, it's a bold prediction. I think you said that you expect to start seeing it in the second quarter, which is now. So I'm assuming -- maybe you could just help us sort of understand why we haven't seen a bigger drop off so far? And what's going to sort of happen over the next sort of 3 to 6 months to sort of result in that large drop that you're expecting?

Sure. So first of all, the starts that are happening today are starts that are legacy starts or maybe in the first quarter were legacy starts, meaning that the deals were teed up. They are fully funded with equity. They have bank loan, and they're looking at the same thing we're looking at. If you deliver in '26, it probably is going to be a really, really constructive market given the current environment. I think the difference between the first -- so legacy deals are already funded. What's happening today, however, which is being exacerbated by the banking crisis is that banks are pulling loans. I mean we -- I'll give you an anecdotal example of, a developer in Florida called me and said that they had a fully funded deal with 35% equity or 40% equity, 6% debt. And the lender pulled the debt after the Silicon Valley Bank situation. And they walked their earnest money and lost a significant amount of money because they couldn't -- the bank pulled the debt. And when you -- when I talk to my friends at regional banks, I mean, they're not funding deals that they thought they would fund in the future. So I think not only has the higher interest rates and rental rates moderating with construction cost hasn't come down enough, and land prices haven't come down enough where the numbers just don't work. And I think that you're starting -- you will start to see that in the second quarter. We think starts might be at the level for the entire quarter what March was, which was around 49,000 units. So I just think that developers are crafty enough to keep their legacy deals in place, and that's why you haven't seen a dramatic falloff in starts. But it's starting to happen, especially since the banking crisis has created, in essence, almost another 25 basis point or 50 basis point rate increase as a result of those banks just pulling out of the market altogether.

Got it. Yes. I mean, I guess that was going to be my follow-up is why to point that now versus, say, five, six months ago because we’ve just been in a very volatile capital markets environment for a while. Rates have been high for a while, moved up in north of 4 last year. So it's just interesting to see to point that now. It sounds like your thought is really that it's a response to what happened with Silicon Valley Bank and some of the regional banking issues that more recent has created the sort of tighter lending environment. And that's what's going to potentially drive some lower starts going forward.

Yes, I think it's twofold, right? First of all, the banking crisis is, in fact, tightening lending. There's no question about that. And there's lots of anecdotal information out there on that. And then the other part of the equation is that developers are very optimistic group, and they'll project into 2026. But they also have a math problem. I mean, you have -- cost of capital has gone up by 30% for most people. And when you then try to figure out, okay, I have my input cost versus what I think the cash flow is going to be, and then you put higher interest rates and higher cost of capital on the equity, and the math just doesn't work. And so until -- unless there's a big shift in thinking where you start seeing major declines in starts, which you think is going to happen, you will -- and then people think, okay, I'm going to go ahead and bet on 2026. The challenge is you've got to bet on massive rent increases to cover your cost of capital increase and your debt increases, assuming that construction costs stay sort of flat. And I think it's just a pretty simple math problem. And while developers will always build if they have capital, right now, both the equity and the debt markets are saying, "Well, let's try to figure out what happens in the future." And because starts are -- I'll emphasize this again, developers build because they can. And when they can't, they don't. And that's what's going on right now.

The next question is a follow-up from Jamie Feldman of Wells Fargo.

Great. So along those same lines, you made the comment before about maybe ramping up start to deliver into a good market in '25 and '26. I mean, what's the magnitude that you would even consider? And when do you have to make a go or no-go decision on really throttling up the development pipeline? And then similarly, when you think about the markets, I mean, where is there the right balance of not too much supply and an opportunity to deliver something into what you know will be a pretty good market?

Yes. So I think that we have a decent pipeline. We -- when you look at our -- I think our pipeline is now 1.3 billion or 1.4 billion that we're having, started. So we have a decent pipeline to start. We have generally been -- we're from 300 million to 500 million of annual starts. And again, the question will be how do we feel about the market and how do we feel about construction costs? And then how do the numbers work, right? And when you get down to -- those are the ultimate questions. In terms of markets, you look at our portfolio and we have some really nice sites in Nashville and nice sites in the Carolinas and in Florida. And so those are all really good viable markets. When you look at all the dynamics that go into those markets from a -- in migration, population growth, job growth, all that are all positive in those markets. So the negative would be in Nashville, for example, is either the top market under construction or the second top may be followed by Austin. And so that's -- those are the dynamics that we'll look at. And if we don't think that the numbers work, we won't build a project. We'll just wait and see what happens.

Okay. And I guess in terms of the balance sheet, how much more than your typical average annual starts do you think you could do or would be willing to do?

Yes. I mean, we've got tremendous capacity under our balance sheet. And it ultimately all comes down to if you think about acquisitions, we could basically put about $1 billion on our balance sheet and still keep our rates where they are. If you look at developments, obviously, they don't contribute EBITDA at the beginning, but our rating agencies would understand that they will over time. And so I think you could have -- if you really wanted to, you could have sort of a swell of starts with a corresponding increase in leverage that could then come back down. So we've got plenty of capacity.

This concludes our question-and-answer session. I would like to turn the conference back over to Ric Campo for any closing remarks.

Great. Well, we appreciate you being on the call today and look forward to seeing you either in the next month or in NAREIT in June. So thank you very much. Take care.